Oil industry presses U.S. EPA to lower 2014 ethanol mandate below E10 blend wall

Two oil industry groups got together on Aug. 13 and asked the U.S. Environmental Protection Agency (EPA) to lower its 2014 ethanol-blending mandate to below 10%.
In a formal waiver request, the American Petroleum Institute (API) and the American Fuel and Petrochemical Manufacturers (AFPM) said lowering the mandate would provide stop-gap protection for consumers and the U.S. economy, while the groups continue to lobby Congress for a full repeal of the Renewable Fuel Standard (RFS).
The API also warned of anticipated gasoline and diesel price increases resulting from the biofuel credits that refiners use to comply with the RFS shrinking in supply and increasing in price.
In addition, the API, the Renewable Fuels Association (RFA), ethanol group Growth Energy, and others filed a response to a recent bipartisan House Energy & Commerce Committee white paper which seeks input on implementation issues with the RFS.
The July 11 committee paper is the fifth and final in a series, following papers on energy security issues, the RFS’ environmental impacts, and other topics. The papers do not take policy positions on the program and instead seek input from a wide range of stakeholders, with the responses expected to inform upcoming hearings. For example, are there problems with the program’s alternative fuel production mandates that warrant Congress intervening? If there are problems, are they correctable by the EPA or are any statutory changes needed?
The final paper listed pros and cons of the program’s implementation as detailed by refiners and others, and gave stakeholders until July 26 to give their input.
A little background information is in order. The EPA has established the RFS which they define as volume percentages to be used by each refiner, blender, or importer to compute their renewable volume obligations (RVOs). The RFS2 program has four standards, so there are four RVOs for each party. If each company meets their portion of the requirements, then the national targets of renewable fuels, cellulosic biofuels, biomass-based diesel, and advanced biofuels will be met as well.
The breakdown of fuel standards for 2013 is as follows – cellulosic biofuel, 6 million gallons; biomass-based diesel, 1.28 billion gallons; advanced biofuel 2.75 billion gallons; renewable fuel, 16.55 billion gallons. Currently, an additional 824 million gallons of advanced biofuels need to be manufactured or imported.
The overall requirement can be met in a few ways. There are currently over 500 million advanced biofuel carryover RINs, or Renewable Identification Numbers, from 2012 available to use. The EPA also estimates that there are 100 million gallons each of excess soy and corn oil which could be used for 300 million gallons of RINs. 245 million gallons of advanced biofuels could be made, and an additional 50 million gallons are potential if projects get approved in time. Lastly, there are imports from Brazil that could reach 580 million gallons or more.
If all of the above sources come through, the 2013 biofuel requirement will be met. As a result, the EPA is not going to reduce the fuel requirement. The EPA is, however, extending the time for RFS compliance for 2013 until June 30, 2014, but this extension applies only to the 2013 year.
Exempt from these standards are companies that produce other transportation fuels, like natural gas, propane and fossil fuel-based electricity.
The EPA has undertaken a review of the process, however. The agency said new targets would be published in September 2013. The refining industry has long said that increasing the amount of ethanol it must blend, even as motor fuel consumption is falling each year, will force it to spend billions on ethanol credits to offset obligations because blending at increased levels would produce fuel that could damage vehicles.
“The important part was this genuine acknowledgement here that the RFS2 mandate system really has a significant problem and that problem will become really exacerbated in 2014,” Philip Rinaldi, CEO of Philadelphia Energy Solutions (PES), the largest refiner on the east coast, said.
“T[he] announcement by the EPA looks good on paper, but we will have to wait and see what the effects will be on current RINs prices,” said Bill Klesse, CEO of Valero. “RINs have become a market all to themselves, which was never the intention of the law.” Although down from a record of USD1.48 in July 2013, RINs are still more than 10 times higher than their prices in December 2012, before fears of the “blend wall” intensified.
In theory, the EPA’s promise to use “flexibilities” in the RFS law in order to ease next year’s targets should be good news for refiners, who feared that falling gasoline demand may leave them logistically unable to meet the targets.
Refiners have discussed passing the cost on to consumers through higher gasoline prices and also exporting at record levels. They are not required to submit RINs for fuel that is sold overseas.
Ethanol proponents, who have fought for years to prevent any change in the mandate, welcomed the EPA’s move, hoping it might ease pressure on Congress to amend or repeal the RFS.
“The EPA’s announcement indicates the agency is willing to make adjustments to the mandate to fit market realities,” said Michael McAdams, president of the Advanced Biofuels Association. The biofuels industry says it backs the RFS because it helps wean Americans off foreign oil while cutting greenhouse gas emissions and providing billions in investment.
It also notes fuels blended with as much as 15% of ethanol have been authorized for use in cars built since 2001, although sales of the fuel are miniscule due to concerns about car engine warranties.
In practice, however, many refinery executives worry that even if the “blend wall” is averted next year, another one may loom as the targets continue to rise. The EPA had previously projected 18.15 billion gallons of renewable fuels would be blended in 2014, up from 16.55 billion gallons in 2013, with that amount rising to 36 billion gallons by 2022. The 2014 amount is comprised of 14.4 billion gallons of corn-ethanol and other non-advanced biofuels, and 3.75 billion gallons of advanced biofuels including cellulosic and advanced ethanol.
In the agency’s statement, which also formalized the 2013 targets, the EPA promised to reduce both the “advanced biofuel and total renewable volumes” next year.
“If EPA does not act, the inability to blend the statutory-mandated amount of ethanol could lead to domestic fuel supply shortages and ultimately cause severe economic harm to consumers and the economy,” AFPM President Charles Drevna said in a statement.
Tom Buis, CEO of ethanol lobbying group Growth Energy, said the petition from API and AFPM is yet another attempt by the oil industry to prevent biofuels from gaining market share.
“It is time that oil companies and special interests stop worrying about maintaining their monopolistic practices and allow competition and choice in the marketplace,” Buis said in a statement.
The ethanol industry used its comments on the white paper to counter API’s arguments by saying it is the oil industry itself that is to blame for the blend wall crisis by refusing to change the infrastructure required to blend and distribute higher biofuel blends. Higher ethanol blends of 15% (E15) and 85% (E85) ethanol would raise the market cap from 10% ethanol (E10), thus eliminating the blend wall threat.
The RFS requires annually increasing volumes of biofuels, primarily corn-based ethanol, to be blended with petroleum fuels. The target for 2022 is 36 billion gallons, leading to concerns that the “blend wall” may soon be breached.
The “blend wall” refers to the situation in which the blend of ethanol in gasoline exceeds 10%.
Unfortunately, most oil companies are choosing to purchase RINs and bank them rather than increasing their use of ethanol, RFA says in its comments. This is occurring despite the existence of practical and economical options for increasing ethanol use.
The House of Representatives’ Energy and Commerce Committee is currently discussing potential legislation to reform the RFS, while the Senate Environment and Public Works Committee is scheduled to hold hearings on the law in the fall of 2013.
(August 7, 13, 14, 15, 2013)